Figuring out how much money someone should have in their pension to retire comfortably can be a daunting task. And in the UK, the latest financial data suggests that most people do not properly prepare for becoming reliant on the State Pension. Unfortunately, in most cases, the State Pension will not be sufficient to live comfortably.
With house prices increasing sharply, most households are straddled with ever-increasing mortgage payments that often continue well into retirement. As such, pension savings are often being stretched far further today than for older generations.
With that in mind, let’s explore the true cost of a comfortable retirement and what steps individuals can take today to try and improve their retirement prospects.
How much pension do I need to retire?
Figuring out how large a pension pot needs to be ultimately depends on the lifestyle someone wants to have as a pensioner. Suppose the plan is to go on regular luxurious holidays and excursions? In that case, then the cost of retirement is going to be significantly higher compared to someone happy spending their time enjoying hobbies like gardening.
It’s also important to consider whether current living expenses are going to change after reaching retirement. For example, let’s say I’ve got five years left before I want to retire, but my mortgage won’t be paid off for another 10 years. In this scenario, I need to ensure there’s sufficient money in the pension pot to cover the last five years of mortgage payments after I lose my employment income.
Working out monthly living expenses is important as it can reveal roughly how much someone needs to save at a minimum.
This approach also takes into consideration personal circumstances that not everyone may share. However, there is a faster, albeit rougher, way to estimate required retirement savings. A general rule of thumb for calculating the required retirement income to maintain an existing lifestyle is to earn two-thirds of a final salary.
For example, someone whose final salary at work is equal to £50,000 per share should strive to earn around £33,500 during their retirement.
Targeting a comfortable retirement
Sadly, even with prudent preparation, the true cost of retirement can sometimes be elusive. But thanks to the Pensions and Lifetimes Savings Association (PLSA) it’s relatively easy to discover how much pension income someone needs to earn to live comfortably.
| Minimum | Moderate | Comfortable | |
| Single | £14,400 per year | £31,300 per year | £43,100 per year |
| Couple | £22,400 per year | £43,100 per year | £59,000 per year |
| House | DIY £100 a year for property maintenance. | £500 a year for property maintenance, £300 contingency. | £600 a year for property maintenance, £300 contingency. |
| Food | Around £95 a week on groceries, £50 a month per couple on food out of the home, £30 a month per couple on takeaways. | Around £100 a week on groceries, £60 a week per couple on food out of the home, £20 a week per couple on takeaways, £100 a month to take others out for a monthly meal. | Around £130 a week on food, £80 a week per couple on food out of the home, £30 a week per couple on takeaways, £100 a month to take others out for a monthly meal. |
| Transport | No car, £15 per week for the couple on taxis, £100 per year per person on rail fares. | 3-year-old small car, replaced every 7 years, £20 a month on taxis per household, £100 a year on rail fares per person. | 3-year-old small car, replaced every 5 years, £20 a month on taxis per household, £200 a year on rail fares per person. |
| Holidays & Leisure | A week-long UK holiday. Basic TV and broadband plus a streaming service. | A fortnight 3* all-inclusive holiday in the Med and a long weekend break in the UK. Basic TV and broadband plus two streaming services. | A fortnight 4* holiday in the Med with spending money and 3 long weekend breaks in the UK. Extensive bundled broadband and TV subscriptions. |
| Clothing & Personal | Up to £630 for clothing and footwear each year. | Up to £1,500 for clothing and footwear each year. | Up to £1,500 per person for clothing and footwear each year. |
| Helping Others | Twelve gifts of £20 for birthdays and Christmas presents. £50 per person a year for charity donations. | Twelve gifts of £30 for birthdays and Christmas presents, £200 per household a year for charity donations. £1,000 for supporting family members. | Twelve gifts of £50 for birthdays and Christmas presents, £25 per person per month for charity donations. £1,000 for supporting family members |
Obviously, prices rise over time, and the cost of living is likely to change in the future. Therefore, this must be taken into consideration when estimating required pension savings.
How much is the State Pension?
The amount of money received by the UK’s State Pension scheme depends on which State Pension an individual is entitled to.
Men born before 6 April 1951 and Women born before 6 April 1953 can claim the basic State Pension. Anyone born after these dates will claim the new State Pension.
Assuming someone has made sufficient payments to earn the full amount, those receiving the basic State Pension will earn £169.50 per week, whereas those on the new State Pension will earn £221.20 a week. On an annualised basis, that works out to be £8,814 and £11,502.40 per year, respectively.
When compared to the recommended minimum annual pension income by the PLSA, it’s clear that relying solely on the State Pension for retirement is insufficient.
RELATED: How Much Is The UK State Pension For A Married Couple?
How much pension should I aim to have in my 30s, 40s, 50s, and 60s?
All too often, saving for retirement is left until someone reaches their 40s and 50s. However, this can be a critical mistake as it forces more aggressive saving later in life, which can negatively impact living standards. Instead, starting earlier reduces pressure later on and improves the odds of successfully achieving a more comfortable lifestyle.
So how much should someone have in a pension? Once again, this depends on personal circumstances. However, as a general rule of thumb, it’s recommended to have the equivalent of one annual salary by age 30, three annual salaries by age 40, then six times by 50, and finally eight times by 60.
So, if someone earns £40,000 per year, their pension savings should look roughly along the lines of:
| Age | Recommended Retirement Savings |
| 30 | £40,000 |
| 40 | £120,000 |
| 50 | £240,000 |
| 60 | £320,000 |
Obviously, these milestones are a rough estimate. However, following the 4% withdrawal rule and assuming a lump sum isn’t taken out at the start of retirement, a £320,000 pension pot would generate an annual income of approximately £12,800.
When combined with a State Pension of £11,500, that brings the total retirement income to £24,300, putting someone firmly on track to a more moderate retirement lifestyle according to the figures by the PLSA.
Therefore, someone aiming for a more comfortable retirement lifestyle should strive to save even more money for retirement. The good news is by leveraging the power of compounding and tax relief, reaching these sorts of milestones isn’t as challenging as it may seem.
The power of compounding
Investing £500 a month (or £6,000 a year) into a pension fund, earning a 6% return each year, could build a £320,000 pension pot in just over 20 years. However, if someone were starting at age 30 and followed this strategy until age 60, their retirement savings would land closer to £628,000.
Again, following the 4% withdrawal rule, that translates into an annual pension income of £25,120. Adding in the State Pension of £11,500 results in a £36,620 annual retirement income, putting someone on track to a far more comfortable lifestyle.
However, it’s important to note that pension funds may fail to live up to expectations, and the State Pension is also likely to change three decades from now. As such, someone may end up with less than expected in the long run. Therefore, it’s generally a good idea to aim for a slightly higher retirement target.
How to catch up on savings
There’s no need to panic if you’re falling behind on saving for retirement. You may have worked out how much you should have saved by 40 and realised you need to save more, but you still have plenty of time to turn things around.
Here are a few steps you can follow to get things back on track and to smash your savings target:
- Make a plan. Use a pension calculator to work out how much you need to save to get the pension you want.
- Make a budget. If you prioritise saving, then you may be able to save more than you think.
- Check your employer’s pension scheme. Employers will often match your contributions, and their contribution is basically free money. Make sure you are paying in enough, so you get the maximum contribution from your employer.
- Check your older pension schemes. You may have pension funds from old employers you’ve forgotten about. It might make sense to transfer them to a different provider with lower fees. It’s often easier to keep track of pensions and save on admin time if they are all in the same place.
- Check your pension fund choices. Many schemes allow you to transfer between funds, and you may be able to earn better returns by choosing better-performing funds.
Building an emergency fund
As well as a pension fund, it’s important to save separately in an emergency fund as you can’t access pension savings until you hit 55 at the earliest.
Most experts agree that it’s a good idea to save between 3-6 months of your expenses to cover a job loss or a huge unexpected bill. Your expenses are probably less than your monthly income, but it’s still quite a large amount to save. Once you’ve got there, though, you’ll have a huge sense of achievement, and you can relax, knowing that you’ve got a buffer in place.
You will probably want to save your emergency fund in an easy-access accountso that you can withdraw your cash quickly if you need to. Take a look at some options for opening a savings account.